February 14, 2011
An FHA Home Equity Conversion Mortgage loan (or HECM for short) is available for qualified borrowers age 62 and older who have equity built up in their home and want to borrow against it. HECM loans are described by the FHA as being a great deal different than the traditional second mortgage for several reasons;
“With a traditional second mortgage, or a home equity line of credit, you must have sufficient income versus debt ratio to qualify for the loan, and you are required to make monthly mortgage payments. (An FHA HECM loan) is different in that it pays you, and is available regardless of your current income. The amount you can borrow depends on your age, the current interest rate, and the appraised value of your home, sales price or FHA’s mortgage limits, whichever is less. Generally, the more valuable your home is, the older you are, the lower the interest, the more you may borrow.”
FHA HECM loans don’t require monthly mortgage payments because the loan doesn’t come due until the owner dies or sells the property. Borrowers who apply for HECM loans are still required to pay their property taxes, insurance premiums, and the usual upkeep associated with owning a home.
Some borrowers have gotten into trouble because they didn’t pay property taxes on homes with HECM loans, which puts the borrower in violation of the law. Not paying the property taxes is one way a HECM loan can become due before the owner dies or sells the home.
There are several instances which can also cause an FHA HECM loan to become due and payable before the borrower dies or sells the property. According to FHA requirements, a borrower who violates the obligations of the sales contract can have the loan declared due. The same rules apply to a borrower who lets the home deteriorate and fall into disrepair, affecting the resale value.
HECM loans require the borrower to live on the property as the primary residence. FHA borrowers who don’t live in the home for 12 months in a row can have their loan declared due, as can those who permanently move to a new home. Many borrowers who qualify for HECM loans don’t apply for them intending to move to a new residence or stay out of the home for a year or more, but it’s important to remember that circumstances like extended stays in the hospital, a long period of
time in a nursing home or a move to a retirement community can all cause the HECM loan to become due if the “12 month” rule is broken.
When applying for a HECM loan it’s a good idea to consider such issues carefully. Borrowers in good health with no plans to leave their home unattended or cared for can apply for an FHA HECM reverse mortgage with confidence, as can borrowers who have healthcare needs that can be addressed within the home.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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